Government to legislate BOJ's operational independence

The government will be taking legislation to Parliament by October this year with a series of reform to make the Bank of Jamaica, BOJ, operationally independent by insulating its monetary policy role from political pressure.

Such independence will allow for the preservation of monetary policy continuity across political cycles and represents probably one of the most consequential reforms of the last five years, according to Finance and Public Service Minister Dr Nigel Clarke.

Under the proposed reform, the minister of finance will no longer have the ability to give the central bank directions on monetary policy, Clarke told a forum on BOJ modernisation in New Kingston on Thursday.

"Having removed the ability of the minister of finance to give direction on matters to do with banking supervision, this move to give the central bank monetary policy independence means that we will be making the central bank operationally independent," he said.

Clarke said the measures are also designed to ensure that the tenure of board members is long enough for individual independence of directors, and the development of sufficient experience and capabilities to discharge the function of accountability effectively.

It will also be constructed so that appointments are staggered "so that while board vacancies are certain to arise during the course of each political administration, no single administration in a single term can change the entire board".

He explained that "all of this is, with the aim of allowing the central bank the operational space and the independence to pursue the monetary policy objective of low, stable and predictable inflation for the benefit of all Jamaicans and to delink it from political pressure".

For democratic legitimacy, it is also crucial that an operationally independent central bank must be accountable to the public for its actions.

"As a result, an important feature of the reform will be to ensure that strong systems of accountability exist. The reform will require the central bank governor to submit to Parliament and to publish at least every six months, or more often if directed by

parliament or as determined by the governor, policy statements of the central bank's performance with respect to monetary policy and its achievements in relation to the

inflation target," he said.

Among other things, the monetary policy committee will also be restructured to include outside members to bring a broader perspective to bear on decisions.

The reforms will also strengthen the BOJ's balance sheet to ensure the maintenance of policy solvency going forward, said Clarke, noting that "this means the central bank will have the financial muscle to pursue its policy objectives".

Free from political control

The minister said consensus has emerged from around the world that the goal of monetary policy should be set by political authorities, but its conduct and implementation should be free from political control.

He explained that if monetary policy is subject to political influence, monetary authorities can be pressured into pursuing expansionary policies for the short-term impact which may be electorally convenient, while having disastrous, longer-term consequences on price stability.

A central bank under the control or influence of the political directorate can be pressured into selling and squandering precious hard-earned reserves to artificially fix the level of the currency in response to anxiety, even if this undermines inflation objectives and even if such interventions have no real lasting effect, because it may be politically advantageous for the administration, he said.

A central bank can also be pressured into helping the government of the day to finance itself, relieving it from the consequences of bad fiscal policies while imposing significant adverse consequences on the country in the medium term.

"These concerns in the Jamaican context are far from theoretical," the minister said, noting that Jamaica is emerging from a long period of fiscal dominance from the early 1990s up until about the last five years where for much of that period, monetary policy essentially propped up government finances.

"It is for those reasons that the focus and the thrust of this reform is strengthening the bank's independence in order to ensure that there can be no undue political influence on monetary policy decision-making," he said.

Revisions to the BOJ Act is part of a structural benchmark under Jamaica's standby agreement with the International Monetary Fund to improve the central bank's governance and independence.